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Marc Jones and William James and Daniel Bases, REUTERS

Jan 15, 2013

, Last Updated: 12:05 PM ET

LONDON/NEW YORK - The United States faces a “material risk” of losing its AAA status if there is a repeat of the wrangling seen in 2011 over raising the country’s self-imposed debt ceiling, credit ratings firm Fitch said on Tuesday.

The United States scraped up against its $16.4 trillion US debt ceiling on Dec. 31 and is now employing special measures to meet its financial obligations. The Treasury Department said those steps could be exhausted by mid-February.

Despite December’s deal by U.S. politicians to avoid the “fiscal cliff” of spending cuts and tax hikes, Fitch’s head of sovereign ratings, David Riley, said pressure on the country’s rating was increasing.

“If we have a repeat of the August 2011 debt ceiling crisis we will place the U.S. rating under review. There will be a material risk of the U.S. rating coming down,” Riley said at a conference hosted by the firm.

U.S. President Barack Obama dug in his heels on Monday, rejecting any negotiations with opposition Republican leaders over raising the U.S. borrowing limit, saying the United States needs to pay the bills it has incurred.

Republicans want Obama to cut some spending to rein in the deficit before they agree to raise the debt limit again.

Ben Bernanke, the Federal Reserve chairman, urged lawmakers to lift the ceiling and avoid a default, warning that while he was cautiously optimistic on the economy, there is still the risk it suffers from political gridlock over the deficit.

“At this stage and this year, I think it is looking very unlikely that you can achieve even $2-$3 trillion (in deficit reduction) given the way Obama has been talking recently,” said David Keeble, global head of interest rate strategy at Credit Agricole CIB in New York.

The deficit reduction that has been bandied about among policy makers and credit analysts is $4 trillion over 10 years.

Fitch currently assigns the United States its highest rating of AAA, but with a negative outlook. Standard & Poor’s has already downgraded the world’s biggest economy, lowering the United States to AA-plus in August 2011 - a move which appears to have done little to dull the attraction of U.S. bonds for investors. In fact, following that downgrade, U.S. Treasuries rallied as investors flocked to the safe haven asset.

Moody’s Investors Service shifted the outlook on its Aaa rating to negative in the same month and has kept it there ever since.

“If you solemnly believe that there is going to be a ratings cut by Fitch in the next month or so, then the only place is to be in U.S. Treasuries, up to the 7-10 year sector and that will perform well as a risk-off trade,” said Keeble, who added any downgrade by Fitch or Moody’s at this point won’t dramatically reshape the world order.

Riley said the United States did not need the same kind of super-strength austerity some major developed economies are currently implementing because it was grinding out more economic growth than other high-debt nations.

But he warned a repeat of the 2011 squabble would undermine confidence in Washington.

“It is a concern that these self-inflicted crises are seeing us stagger every six months to a new deadline,” Riley said.

“That uncertainty over economic and fiscal policy is something that is not typically characteristic of triple-A, and more substantively we think it is weighing on the prospects for growth and the recovery.”

EURO ZONE FORTUNES DIVERGE

Fitch said Spain will continue to face downgrade risks even if it avoids having to ask for a bailout, while Ireland could claw its way back into the single-A rating band if a deal is struck to share the burden of its banking debts.

On BBB-rated Spain, Riley said the downgrade risks were its ability to deliver on deficit reduction, the cost of bank recapitalisation and its weak economy.

Ireland, which was bailed out in 2010, could see a possible increase in its BBB-plus rating to the single-A category if its debts can be shared out among euro zone states through the region’s bailout mechanisms, Fitch said.